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Relative price dispersion: evidence and theory

Author

Listed:
  • Kaplan, Greg

    (Princeton University and NBER)

  • Menzio, Guido

    (University of Pennsylvania and NBER)

  • Rudanko, Leena

    (Federal Reserve Bank of Philadelphia)

  • Trachter, Nicholas

    (Federal Reserve Bank of Philadelphia)

Abstract

We use a large data set on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers’ attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.

Suggested Citation

  • Kaplan, Greg & Menzio, Guido & Rudanko, Leena & Trachter, Nicholas, 2016. "Relative price dispersion: evidence and theory," Working Papers 16-6, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-6
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Guido Menzio & Nicholas Trachter, 2018. "Equilibrium Price Dispersion Across and Within Stores"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 205-220, April.
    2. repec:eee:reecon:v:71:y:2017:i:4:p:784-797 is not listed on IDEAS
    3. Fabra, Natalia & Montero, Juan Pablo, 2017. "Product Choice and Price Discrimination in Markets with Search Costs," CEPR Discussion Papers 12046, C.E.P.R. Discussion Papers.
    4. repec:eee:jetheo:v:172:y:2017:i:c:p:423-450 is not listed on IDEAS
    5. repec:eee:indorg:v:58:y:2018:i:c:p:162-182 is not listed on IDEAS
    6. Garth Baughman & Stanislav Rabinovich, 2018. "Self-confirming Price Dispersion in Monetary Economies," Finance and Economics Discussion Series 2018-046, Board of Governors of the Federal Reserve System (U.S.).
    7. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    8. repec:fip:fedreq:00045 is not listed on IDEAS
    9. Daruich, Diego & Kozlowski, Julian, 2018. "Retail Prices: New Evidence From Argentina," Working Papers 2018-10, Federal Reserve Bank of St. Louis.
    10. Rhodes, Andrew & Watanabe, Makoto & Zhou, Jidong, 2017. "Multiproduct Intermediaries and Optimal Product Range," MPRA Paper 82136, University Library of Munich, Germany.
    11. David Fielding & Christopher Hajzler & James MacGee, 2017. "Price-Level Dispersion versus Inflation-Rate Dispersion: Evidence from Three Countries," Staff Working Papers 17-3, Bank of Canada.
    12. Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.
    13. Andres Drenik, 2017. "Pricing in Multiple Currencies in Domestic Markets," 2017 Meeting Papers 1418, Society for Economic Dynamics.
    14. Garcia, Daniel & Janssen, Maarten, 2018. "Retail channel management in consumer search markets," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 162-182.

    More about this item

    Keywords

    Price dispersion; Equilibrium product market search; Retail pricing; Goods;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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